Wall Street has outpaced Main Street, but groups are able to fund new initiatives

Association net assets in relation to budgets are back to 2007 levels on a combination of spending restraint and years of strong stock and bond market gains, according to a CEO Update analysis.

This financial strength has put many groups in a better position to fund new efforts from reserves, including the Heart Rhythm Society, the National Association of Counties and the International Franchise Association.

However, associations are not feeling rich, as member business improvement has been modest.

Olcott

Keen

"We haven't seen any clients saying, ‘Wow, things are tremendous and we need to do something different,'" said Rob Olcott, managing director of Orion Investment Advisors, which advises many associations.

"Economic growth has not kept pace with the growth we have seen in the financial markets. There's a big disconnect there," he said.

But as a result of the financial crisis, more associations recognize the value of healthy reserves, and volunteer leaders are getting more involved in investment policy, he said.

"Volunteers are more involved than they were 10 years ago," Olcott said. "More and more associations have modified their governance structures to remove the oversight of reserves from the board audit and finance committee and they have created separate stand-alone investment committees to oversee the work of the advisers and the strategy for their reserves."

That has benefits and drawbacks, Olcott said.

"It is a healthy trend, but associations always need to be careful because the people coming on to the investment committee can, in many cases, come with their own personal investment experience and biases," he said. "They need to understand that the association is not their own personal 401(k) and shouldn't be invested accordingly."

CEO Update analyzed tax filings for 457 associations of more than $10 million in revenue as of 2007 and tracked the changes in revenue, expenses and net assets from that year through 2013—the latest for which complete records are available.

The analysis shows that net assets are more volatile than expenses and revenue, having plunged in 2008 before recovering strongly in recent years.

Net assets—that is, assets minus liabilities—are a highly imperfect proxy for association reserves. The figure as reported on Form 990 includes much more than cash and investments, such as accounts receivable and the depreciated value of property including land and buildings.

In a separate analysis, CEO Update looked at the 2013 reported net assets of nearly 1,600 associations broken down by group size. This showed that net assets as a percentage of expenses grew progressively with association size as measured by revenue. Smaller groups are much more likely to operate on a shoestring than larger groups, and likely have more conservative investments.

Society in surplus rhythm

Chris Busky, EVP and COO of the $17 million-revenue Heart Rhythm Society, said his group's operating budget for 2015 is the same as it was in 2010. The board has gotten more involved in reserve policy, he said, but not to the extent of micromanagement.

HRS has worked hard to build up reserves to nearly $8 million—close to its target of 50 percent of operating expenses—from just $3 million six years ago. Only part of the gain is attributable to investment gains.

"We budgeted for larger surpluses every year, which meant that we had to do much better planning and have better discipline. We transferred the full surplus to the reserve fund every year," Busky said.

The society also changed the investment policy for its long-term reserve fund to allow more exposure to risky assets such as stocks that have more growth potential than cash and bonds. HRS also has a short-term reserve in a checking account. Orion is the group's investment adviser.

HRS succeeded in building reserves even while drawing on savings to fund two new initiatives, one of which it has since discontinued, illustrating the point that reserves are there for a reason, association executives say, and not just for rainy days.

The $14 million-revenue National Association of Counties has more than twice its budget in reserves—primarily because the group was saving to buy a building on Capitol Hill. Out of $30 million in reserves, $20 million was earmarked for the purpose.

But CFO David Keen said the limited supply of available Hill real estate—where the association now rents its office—makes it likely the group will continue as a tenant. Its current lease expires in 2017.

"A couple of months ago we notified the board that the buy option was not on the table," Keen said. The board is now considering other uses for the money—but cutting dues is an unlikely choice, as that could diminish the perception of membership value. Dues already are as low as $450 a year for small counties.

"There has to be some financial buy-in," he said. "If you lower dues to the point it doesn't matter, they lose some of the sense of value from their perspective," he said.

One option for NACO is to endow its educational arm, the National Association of Counties Research Foundation, which helps develop elected officials' leadership skills. Now foundation programs depend on grants and corporate sponsorship.

NACO is working with its adviser, Raffa Wealth Management, and benchmarking against other associations to help determine an appropriate size for the reserve fund. Keen said most associations seek to have 50 percent to 75 percent of annual expenses in cash and investments.

"We're making a risk-based assessment," he said. "What's the risk a conference could go bad and what would we need to recover? Or if a revenue stream dried up for some unforeseen reason, how would we address that?"

The $14 million-revenue International Franchise Association has $14 million in reserves, which is apportioned to operating and legislative reserves, said CEO Steve Caldeira. The board last year approved drawing on reserves to fund increased advocacy efforts, but on the condition that Caldeira implement a plan to rebuild assets over time. Caldeira called the board debate "robust."

The reserves are for a rainy day, but that day has arrived, he said: Franchisees and franchisors feel beset by threats in the form of efforts to raise the minimum wage and to treat franchise workers as employees of large franchisors—such as McDonald's—rather than as employees of small businesses.

"I went to the board in June and again in September to ask them for specific amounts of dollars to support certain initiatives in order to protect the franchising model. The board had a robust discussion and dialogue. At the end of the day, the board approved the request for funding, with the caveat that I fundraise and work with the staff on a replenishment plan over time," he said.

IFA's spending on increased advocacy—including the hiring of new policy experts—is "well into the seven-figure range," Caldeira said.

As a result, he is raising funds from members—including large corporations, multi-unit franchises and supplier partners—over and above dues to help fund the push. Other options are under consideration for closing the funding gap.

"You have to look at everything. A dues increase is certainly a possibility, and will most likely happen in fiscal 2016," Caldeira said. "A one-time special assessment or surcharge is possible. And managing expenses should always be a top priority whether you're rebuilding reserves or not. My sense is that we will do a combination of all of these."